Queen’s Speech

Lord McFall of Alcluith Excerpts

Wednesday 25th May 2016 Lords Chamber

[Lord McFall of Alcluith (Lab)]

My Lords, strengthening the economy, supporting economic recovery and moving to a higher wage economy where work is rewarded: those phrases resonated in the first three paragraphs of the Queen’s Speech. I tell the Government that those cannot be achieved without a well-functioning banking system. Presently, that is a distant prospect, as shown by the evidence that we in the NCA—the New City Agenda—have received from participants: Martin Wolf, Sir John Vickers, John Kay, Philip Augar, Anthony Hilton of the Evening Standard, the former chief executive of Barclays Bank Antony Jenkins, the right honourable and most reverend Primate the Archbishop of Canterbury, and Andy Haldane, the chief economist at the Bank of England, who addressed us last week.

The key message from these individuals is that banks are not functioning for the benefit of either the economy or society. Antony Jenkins, in his speech to us, said that banks are presently not properly fulfilling their role to society and generally they are unhappy places to work. He had a mission to change the banking culture of Barclays. He told his superiors that it was a five to 10-year project. He ran out of patience and left after three years. He was quite clear when he told us that there are still large parts of the industry thinking that this will pass. All informed commentators find it hard to see any bank following the culture transformation through.

Why is this so important? I mentioned Andy Haldane, who addressed our annual dinner last week. The title of his speech, which is on the Bank of England website, is “The Great Divide”. It looked at the difference between the financial insiders and outsiders. The Bank carried out polling at the end of 2015 on the perceptions of the financial sector. The word most used by the general public, the customers rather than producers, was “corrupt”. Not far behind were the words, “manipulating”, “self-serving”, “destructive” and “greedy”. That underscores how far the financial services must still travel to regain their social licence.

We have seen the foot taken off the pedal by politicians, regulators and corporations. With the politicians, the Parliamentary Commission on Banking Standards made a recommendation to reverse the burden of proof, which was altered by the Government. The regulators dropped their review of banking culture at the end of last year. The corporations, as I mentioned in my last speech here, witnessed bonuses paid out of pre-tax not post-tax profits which means executives do not pay for their misconduct. Also, we witnessed creative accounting through issues such as adjusted profits. Indeed, the chair of the International Accounting Standards Board, Hans Hoogervorst, stated that adjusted earnings paint a misleading picture of the financial position of companies. We see real bonuses still being paid out of fake profits. We thought that had gone in 2008.

If the incoming chief executive of the Financial Conduct Authority, Andrew Bailey, is serious about re-establishing the authority and writ of a demoralised and cowered organisation, he must review the decision to downgrade culture to what it calls normal bank supervision. This cannot be allowed to be behind closed doors, with no assessment of progress and no publication of good or bad practice. Such a secretive approach damages the accountability of banks and regulator. The Government should tell Andrew Bailey that he cannot franchise this to outside bodies which are presently unwilling to identify individual banks regarding cultural progress or otherwise. This reminds me of when I was chairman of the Treasury Select Committee and we had the issue of basic bank accounts. At the time, that was monitored by the Banking Code Standards Board, which referred to banks as “A”, “B”, “C” and “D”, and did not identify them. The result was that I ensured that this was achieved— the floodgates opened and we had meaningful assessment of and progress in what was happening.

We need to ensure that there is public accountability and transparency of assessments of progress. Only the Financial Conduct Authority has the ability to ensure this outcome. We also need to ensure that bank chief executives are held individually accountable for poor culture and demonstrate a greater appetite to take enforcement action against executives. We have seen the so-called shareholder spring recently. Again, Andy Haldane said in his speech:

“Ultimately … these investor votes are binding on neither management nor boards. They are a ‘Say on Pay’, but not a ‘Stay on Pay’”.

Little or no effect has been had on executive compensation packages as a result of investor action. In fact, cases of investors actively voting against pay packages are as rare as hens’ teeth. The system of executive pay is broken. There are still high rewards for those at the top. In the banking sector, this allows senior management to harvest the fruits of large and open-ended subsidies from the taxpayer.

The incoming chief executive, Andrew Bailey, said recently in his speech, “Culture in Financial Services,” that culture had laid the ground for bad outcomes. It has, absolutely. He said:

“A change of culture is possible and as the England Cricket team has demonstrated to our great enjoyment, a lot can be achieved in a short space of time where there is commitment”.

I have two comments. First, this is not a short space of time but a five to 10-year programme and the FCA must put its foot on the pedal. Secondly, a comparison with the English cricket team is, I suggest, rather vacuous and trivialising. The global financial crisis devastated both financial and social capital. For example, the market cap of the world’s 20 largest banks in 2016 remains about half its value in 2007. The market value lies well below the book value of their assets. Put simply, that means that many banks are a value-destruction machine for investors.

Yet those losses pale into insignificance given the loss felt by the wider economy. Nine years on from 2007, GDP is still 15% below pre-crisis level. That is a cumulative income loss of £1.8 trillion—or one year’s GDP. That is mind-boggling, and the clock is still ticking. Yet perhaps the biggest loss is social capital, which is intrinsically linked to trust. My message to the Government and regulators—the FCA and the Bank of England—is that the recovery of financial and social capital is essential if we are to ensure that finance plays its proper role in society. We have witnessed finance as a growth killer not a growth booster. We saw the social cost of that on livelihoods, with businesses destroyed, unemployment increased and young people’s opportunities lost. New City Agenda is coming out in the next month with a report on the culture of regulators. I tell the Government this because we are on their tail as well as others here. We will not give up until this cultural problem is tackled effectively.

The Economy

Lord McFall of Alcluith Excerpts

Thursday 28th April 2016 Lords Chamber

[Lord McFall of Alcluith (Lab)]

My Lords, it is a pleasure to participate in the debate and to compliment and reflect on Lord Peston’s life. He was a very wise and charitable mentor to me. When I assumed the chairmanship of the Treasury Committee, he invited me to lunch. I remember his words very well. He said, “You’ll be faced by many eminent people whom you will question—economists and bankers. But keep in mind the phrase I’m telling you, that these individuals don’t know their A from their E”. For the sake of sensibilities, “E” stands for “elbow”. I was able to go back to Lord Peston a number of years later and say, “Maurice, you were spot on. How prescient you were”. I pay tribute to a wonderful man who enhanced the life of the country and this House.

The Minister mentioned financial services as one of the strong areas in building a stronger economy. I will focus on that today, and in particular on my membership of the Parliamentary Commission on Banking Standards and what I consider the unfinished business of changing the culture and practice in banking. I suggest that the Government have not taken steps to build a stronger economy. I, along with others, wish them to take these steps.

Last week, the New City Agenda think tank, which I founded with David Davis MP and the noble Lord, Lord Sharkey, came out with a report on the 10 top misconduct scandals in retail banking in the UK. We were very clear in saying that the profitability of UK banks was still imperilled by persistent misconduct, an aggressive sales-based culture and excessive remuneration. As a result of that, every citizen is poorer through our pension funds and our ownership of the bailed-out banks.

To date, since 2000, £53 billion in fines and redress has been paid by UK banks. Of that, £38 billion alone was for payment protection insurance and £5 billion for interest rate hedging products to small businesses. This equals four times the cost of staging the London Olympics—and, in a Scottish context, you would have been able to pay for the education budget in Scotland for the previous 10 years, and for the next 10 years give every working person in Scotland a £1,000 per year tax cut. That is an enormous sum which has gone out of the economy.

My question is: where have the shareholders been while this has been happening? At a time when the UK corporate governance framework has been called into question, with the BHS scandal this week, and with continuing bad practices in banks, shareholders should be leading the campaign for change in banking culture and in raising professional standards. They should be doing so by forcing senior executives to change unacceptable behaviour and business models. I say that from my experience on the Parliamentary Commission on Banking Standards. We met for two years and asked 10,000 questions. The main conclusion was that senior executives were not taking responsibility.

To change culture in banking you need individual buy-in. It cannot be franchised to outside bodies. It cannot be done by osmosis. I suggest that shareholders and UK Financial Investments—the taxpayer body for bailed-out banks—have been pusillanimous at best and negligent at worst. Why cannot UKFI, on behalf of the Government and taxpayers, take a lead in encouraging other shareholders to demand public and transparent assessments of the progress of each bank? Why can it not appoint an independent body to assess and report publicly? Why cannot UKFI and shareholders ensure that where senior executives preside over misconduct, they are held to account and a significant clawback of bonuses is demanded? That is not happening. Government, regulators and shareholders have taken their foot off the pedal.

After Christmas, the Financial Conduct Authority abandoned its cultural review and incorporated that activity into what it called “normal banking supervision”. What does that mean? It means that it is carried out behind closed doors, with no assessment of progress or publication of good and poor practice. This secretive approach damages the accountability of both banks and regulators. I shall illustrate why this is so damaging. Between 2010 and 2014, Lloyds Bank paid out more than £14 billion in retail banking misconduct costs. It paid out just £500,000 in dividends to shareholders but £2.1 billion in bonuses. RBS, another bailed-out bank, paid out £6.4 billion in misconduct costs, not one penny in dividends, and £3.8 billion in bonuses. Barclays could have trebled its dividend to shareholders if it had not had to pay £7.3 billion in misconduct costs.

I shall examine the bonus issue further. The Lloyds annual bonus pool, and the senior executives’ bonuses, are based on underlying pre-tax profits. Those profits were up 5% in 2015—but the post-tax profits, after misconduct costs, were down 36%. RBS paid out on long-term incentive plans linked to what it called “operating profit” costs, which excluded misconduct costs. Barclays paid its bonuses on “adjusted” profits before tax, excluding misconduct costs.

The pre-tax profits exclude misconduct costs and the extra tax demanded by the Government. So, eight years after the financial crisis, the bonuses are not paid on real profits and the senior executives do not contribute to the bad behaviour because they are paid excluding misconduct costs. That is the situation today.

Let us take the most egregious example of the payment protection insurance mis-selling: Lloyds Bank, which had to pay £14 billion. The noble Baroness, Lady Kramer, was with me for the session when the former chief executive of Lloyds came along and, when confronted with that £14 billion misconduct, said that Lloyds were on the side of the angels as far as PPI mis-selling went. How far can one get from reality? For presiding over the misconduct regarding how PPI complaints were dealt with, subsequent to selling it—which, by the way, cost Lloyds shareholders more than £1 billion—the Lloyds CEO lost £234,000 of bonuses. That translates to 0.73% of his accumulated remuneration of £33 million over the past five years. How do the FCA and PRA expect the threat of clawback to have a significant impact on management behaviour when the levels of clawback are so minuscule and derisory?

The Parliamentary Commission on Banking Standards called for a rethink of corporate governance and asked for the removal of shareholder primacy in respect of banks. In the light of BHS and others this week, I would suggest that we need a review of the Companies Act 2006. In the same week that Philip Green has taken ownership of a £100 million yacht—after milking BHS dry—11,000 workers in BHS stores have lost their jobs, with many suffering the loss of their pension and others supported by the taxpayer through the Pension Protection Fund.

The establishment of the Pension Protection Fund was not for the benefit of conmen. It was not for the benefit of people who inherited a surplus pension fund and then denuded it and took £500 million to £600 million out of the company. That is not how fair corporate governance should be practised in the United Kingdom and the Government need to do something about it. We are witnessing the extraction of maximum value from a company with no regard for anyone else with an interest: employees, the community or stakeholders. That is in need of urgent change.

I will focus a little more on Philip Green. The Parliamentary Commission on Banking Standards looked at the scandal of HBOS. If you go through the HBOS files, you will see that Philip Green was a recipient of largesse from HBOS. He received personal loans of well over £1 billion, so he was able to buy up companies, milk them and move on because we had a bank that was clueless about corporate governance. The link-up between good corporate governance in a company and how our banks behave is illustrated by this particular point. It really is beyond parody that, a couple of years ago, the Government asked Philip Green to review government spending and procurement. I hope that they lock away his conclusions.

My last point is on Credit Suisse—I know that the Minister will be interested in this. Last week it was reported that Credit Suisse was examining selling bonds that offload its risk from issues such as rogue trading and cybercrime. It will kick in if the losses are between $3.5 billion and $4.5 billion. That means that it is tolerating rogue trading and cybercrime—and it shows that very little has changed in the culture. What is the message there? It is that the crooks can survive, but as long as a bank offloads the risk of crooked activity to some other poor sap, that is fine. That should not be how our banks are behaving. I hope that the Minister communicates directly with the regulator on issues such as this to prevent this unacceptable practice.

So I am calling for renewed shareholder vigilance. I am calling for transparency and assessment of progress. I am calling for a proactive regulator so that we do change the culture. I am calling for a review of the Companies Act 2006. While the banks were ripping off customers, the shareholders were looking the other way. I want them to focus on the banks. Perhaps we can reduce this to one banking scandal: the customer has been at the bottom of the pile. If we view this through the other end of the telescope—the customer end—perhaps the country, the Government and the taxpayer will prosper from a stronger and more efficient economy.

Budget Statement

Lord McFall of Alcluith Excerpts

Wednesday 23rd March 2016 Grand Committee

[Lord McFall of Alcluith (Lab)]

My Lords, it is a great pleasure to follow the noble Lord, Lord Higgins, and others. First, I congratulate the noble Lord, Lord Price, on his excellent maiden speech—I do not think he is in his place at the moment—and on his wise stewardship of John Lewis and Waitrose over many years. It is an example of an outstanding business. Like others, I have a vested interest because a Waitrose has opened in Helensburgh in my former constituency. I hope that this message reaches the noble Lord because the supermarket has a two-hour parking waiting limit. My family say that that was totally unsuitable for my wife, who loves to go and meet her friends there. If the noble Lord, Lord Price, could intervene to ensure that her car is not clamped after two hours, it would do me very well.

I congratulate the noble Baroness, Lady Knight, not only on her speech but on her sterling service in Parliament from 1966 to 1997. I shared more than a decade with her in the House of Commons. She was always pithy and relevant in her comments, sometimes rather controversial—but we will leave out the controversial aspects today because it is a lovely day. She served her constituents and Parliament exceedingly well. I think that she is in the record books as being the first Member of Parliament to be succeeded by another woman Member of Parliament for her constituency, so I offer her many congratulations on that, too.

I made a speech on the Autumn Statement in December, just over four months ago, and said then that,

“we have had four Budgets and Autumn Statements but all they have done is to serve to confuse, not clarify. My first plea is: let us stop the nonsense of this plethora of set pieces for the Chancellor and go back to the time when there was one Budget per annum. Then we might have some sense in our debate”.—[Official Report, 3/12/15; col. 1209.]

If the Chancellor had listened to that, we would not have got into the jam that we are in today. My prescience on the matter might best be described as the unimportance of being correct.

One of my favourite authors is Joan Didion, the American author. She wrote a stunning and very moving book, The Year of Magical Thinking—I do not know whether any of your Lordships have read it, but it is a fantastic book. It is focused on the story of a year spent wishing. I thought of the title of that book when we had this Budget because the Chancellor did not get even one week of thinking or wishing as a result of it before the Budget dissolved. Some of his own colleagues have called it nothing other than a fiddler’s charter.

I have been thinking about the Budget in terms of being a customer of a bank, where I would put the moneys into thousands rather than the billions that the Government mentioned. I would walk into my bank and ask the bank manager for £55,000, which is the black hole in the Government’s figures at the moment. But I would tell him, “By the way, I’m giving away £4,000 of that £55,000. And, by the way, my income over the next five years is reducing because the economy is getting smaller. And, by the way, I’ll not be working as hard because my productivity will be down”. That is what the OBR has told us. I feel that a wise bank manager would show me the door pretty readily.

My noble friend Lord Darling has asked already in an excellent speech who would believe that a £21.4 billion deficit in 2018-19 could become a £10.4 billion surplus in 2019-20. Contrary to all recent history, the Chancellor would be inflicting an incredibly painful fiscal tightening one year before an election. It does not make sense. By the way, the national debt at that point is estimated to be £2 trillion. It is okay if the national debt increases when the economy is increasing, but the economy is decreasing. Here we have a debt of £870 billion which the Government inherited from the Labour Government in 2010 which has now increased by 130% to £2 trillion. The IFS is very clear that the economy was £18 billion smaller than expected in 2015. It went on to say that if the forecasts for economic growth and productivity from a few months ago in the Budget are correct,

“we should all be very worried”.

So there is lower wage growth and a smaller economy, and productivity is bombing. In terms of productivity, the ONS is clear that the current estimates suggest that the absence of productivity growth in the seven years since 2007 is unprecedented in the post-war period. That would be okay if it was predicated on sound economic forecasts, but the £3.5 billion tax breaks for small business and higher personal allowances for income tax are based on what the OBR calls “highly uncertain” projected revenues from tax-avoidance measures.

These are measures to collect tax from those funnelling cash into tax havens. The Government estimate for that was £1.05 billion, but the OBR has said that there is a £780 million shortfall because just over £200 million has been collected with 80% of the estimate being uncollected. I suggest that noble Lords would not organise a day at the seaside for their local community club on that basis because if you got to the seaside, you would certainly be hitchhiking on the way back as a result. In the space of four months from November, a £27 billion windfall has become a £56 billion black hole. As Robert Chote of the OBR said,

“for every pound the chancellor found down the back of the sofa in November, he has lost two pounds this time”.

Mention has been made of the fiscal rules. Two out of three have been broken. The welfare cap was broken last year. The rule for debt to be falling every year as a share of national income has been broken. It is only obeyed by the Chancellor bending the rules on corporation tax with a one-off batch of payments in 2019-20. Policy decisions, not changes in economic forecasts, will increase borrowing by £7.5 billion in 2017-18 and by £4.8 billion in 2018-19. Then, magically, policy decisions in 2019-20 will reduce borrowing by £13.9 billion. That wipes out the £13.4 billion deterioration in the underlying public finances created by the OBR’s less optimistic economic forecasts.

The Chancellor should have known better because he unwisely criticised the previous Chancellor, my noble friend Lord Darling, in 2010 when the Labour Government introduced their fiscal rule. What the Chancellor said then is worthy of repeating. First of all, he declared that it was the “biggest load of nonsense”. Secondly, he declared that it was vacuous and irrelevant. He had the temerity to quote Willem Buiter of the MPC. I know the Minister knows him very well. Willem Buiter said

“Fiscal responsibility acts are instruments of the fiscally irresponsible to con the public”.

The Chancellor has well and truly conned the public today as a result of that.

The Chancellor’s forecasts rely not on strong growth in the economy but on strong growth in household debt and a buoyant housing market given a further boost by government subsidies. Having warned about the consequences of debt-fuelled growth, the Chancellor is now relying on it. The OBR expects household debt to continue to rise over this Parliament, and in 2020 the household debt to income ratio will exceed its previous peak of around 164%, close to the peak at the 2007 financial crisis. My question for the Minister is this: is this level of debt sustainable in an environment of possible rising interest rates?

This is against the background of a 4.4% savings ratio in the third quarter of 2015. The last time it was so low was when we heard “Blowing in the Wind”—yes, in 1963, when Bob Dylan released his famous song. That sums up precisely what the Chancellor is doing. He is blowing in the wind and his own party is generating a hurricane for him coming from within his Cabinet.

The noble Lord, Lord Higgins, mentioned my successor, Andrew Tyrie. He was scathing in his speech on the Budget last week about the balanced budget rule. In fact, he said quite clearly that this Government’s record is worse than that of any other previous Government. He pointed—this is my last point—to the profound weakness of the banking system.

In the past couple of months I have had the privilege to chair sessions with Martin Wolf, John Kay, Philip Augar and Mervyn King, when he launched his book The End of Alchemy in Glasgow just last week. I have also had discussions with the noble Lord, Lord Skidelsky. To sum up the situation, there is a weak banking infrastructure and these learned individuals are telling us that the Government have sold the pass on reforming the banking system. At best, Martin Wolf has said, it is the old system with a few bells on it. The question now, they say, is that if and when the next financial crisis comes—and no doubt it will come at some time—we have to hope that we have individuals who can tackle the problems correctly and quickly. At the moment, the Government have stood back and the political impetus to change the system has gone. We need to change the system because it is not serving the best interests of the country. I could refer to my successor’s remarks on the Budget last week when he said that the issue of small businesses and banking is still a huge one. Long-term strategic interests are being ignored but, more importantly, the contemporary issues regarding business and growth still have to be addressed. With that in mind, I hope that the Minister will respond to those comments.

Income Inequality

Lord McFall of Alcluith Excerpts

Thursday 21st January 2016 Lords Chamber

[Lord O'Neill of Gatley]

My Lords, of course one can infer some tentative implications about productivity from yesterday’s data on employment, but it would be very premature to do so. We know from the very latest productivity statistics that, if one uses a magnifying glass, there has been a modest increase in productivity in the last two quarters for which data have been reported. It is an ongoing observation that, in what are generally currently regarded as some of the most successful economies in the world, cyclically, the US included, they have, if anything, an even bigger apparent conundrum on this than we do here in the UK, because of the evidence of the past 12 months.

[Lord McFall of Alcluith (Lab)]

My Lords, the latest figures indicate that the salary of a chief executive in the largest corporations in America is now 333 times the average wage, while in Britain it is now 180 times that. The Minister is right that inequality has been growing in Britain for the last three years. It is now at the level of World War 2; if in 20 years’ time we continue this trend, it will be at the level of Victorian standards. As a distinguished economist, the Minister could do us all a favour by telling the privileged members of the Cabinet that GDP is not the best way to measure the prosperity of a country; it should be a measure of well-being. If we focused on that area, we might start to tackle this horrendous problem.

[Lord O’Neill of Gatley]

My Lords, I take the noble Lord’s suggestions with great interest. I repeat that it is the responsibility of boards and their shareholders to analyse and support the compensation of their chief executives. As we have touched on in parts of the productivity plan, those boards and shareholders should think carefully on an ongoing basis about the justification for those levels of remuneration.

Autumn Statement

Lord McFall of Alcluith Excerpts

Thursday 3rd December 2015 Lords Chamber

[Lord McFall of Alcluith (Lab)]

My Lords, it is a pleasure to follow the noble Lord, Lord Carrington, on the Autumn Statement. In the past year, we have had four Budgets and Autumn Statements but all they have done is to serve to confuse, not clarify. My first plea is: let us stop the nonsense of this plethora of set pieces for the Chancellor and go back to the time when there was one Budget per annum. Then we might have some sense in our debate.

On 27 November, the Autumn Statement gave the Chancellor an early Christmas present from Santa in the guise of the Office for Budget Responsibility. The figures from the last three months alone improved by £27 billion and, like a nervous gambler, the Chancellor has cashed in all his chips on this issue, despite the OBR saying that there is just over a 50% chance of the Government achieving their fiscal mandate. This was from a Chancellor who has consistently failed to achieve his borrowing targets. Seven months into this financial year he has already borrowed £54 billion, adding to the £1.5 trillion of national debt. He has failed not only his own targets but those of Alistair Darling, now my noble friend Lord Darling, who would have had £74 billion in his Budget this year—a target the Chancellor proclaimed at that time risked economic catastrophe. Yet we are in a much more difficult situation today.

At a Thursday breakfast at the Institute of Economic Affairs, I was on the panel along with quite a number of distinguished Conservatives, former Cabinet Ministers, Select Committee chairs and others. At the beginning of my speech, I asked, “Did anyone here understand the figures produced by the Chancellor yesterday in the Autumn Statement?”. Everyone said no, so I have a message for the OBR. I am aware that on 15 September, the Treasury Select Committee endorsed Robert Chote for a second term on the basis of his professional competence and personal independence. That is a judgment with which I fully concur, having known Robert for many years in that position and elsewhere, but I have a warning for him. The OBR’s integrity will be questioned if he allows the Chancellor to play his Budget games.

What is the solution to that? It is for the OBR to have a bit of courage and make the reports publicly available a decent time before the Autumn Statement. Then the whole of Parliament can have that opportunity to analyse them and there can be meaningful engagement and a sensible debate between Parliament and the Executive. The Office for Budget Responsibility has to show its teeth here. There is also the issue of data across departments. Those were the bane of my life when I was chairman of the Treasury Committee; I note that Paul Johnson has asked for that very point to be addressed. The OBR could do that and help to demystify the figures.

The Autumn Statement has been defined by asset sales, the taxation of banks and pensions—asset sales which are, by the way, larger than we had in the 1980s under Mrs Thatcher. The taxation of banks will penalise the challenger banks at the expense of the too-big-to-fail banks and, on pensions, the Treasury coffers have been increased but the long-term costs and the risks to individuals are being loaded. So the Chancellor has put short-term reform above long-term reform, as we can see in terms of intergenerational fairness. People aged 40 now earn significantly less than people who were aged 40 earned 10 years ago.

On housing, the Chancellor made the proclamation, “We are the builders”. If so, we are not very good at it because, today, the construction survey showed that housebuilding is at its weakest pace since June 2013 and that the rise in construction jobs is the worst since that date. It said that there were shortages in key materials, supply chain capacity and skill capability. These are the core issues a Chancellor should be focusing on. Instead, we have vanity statements and projects that hope to ease his path into No. 10. When I came in here, I was thinking, “What is the Autumn Statement?”. It is a bit like a satnav and, given that, we should hear an instruction: “Make a U-turn at the next exit and make it quickly”. I think we wait in hope, rather than expectation, for that.

Spending Review and Autumn Statement

Lord McFall of Alcluith Excerpts

Wednesday 25th November 2015 Lords Chamber

[Lord O'Neill of Gatley]

My Lords, the Chancellor’s Statement was very clear on this issue. He will welcome the noble Lord’s appreciative comments.

[Lord McFall of Alcluith (Lab)]

My Lords, if it is the case that in a short three-month period from July to November the transformation in the Government’s figures was due solely to the generosity of the OBR, will the Minister confirm that spending by the Government will be £83 billion more in this Parliament, funded by £47 billion of tax increases and £35 billion of welfare cuts? Given the answer that was given earlier, the Autumn Statement is silent on the welfare cuts. Will the Minister indicate where that £35 billion will come from over this Parliament?

[Lord O'Neill of Gatley]

My Lords, as I have already said, it is indeed the case that the new baseline that the OBR presented allowed for considerably more flexibility in today’s announcements. However, it does not change the overall thrust of economic policy. What it has done, as I emphasised, is given more flexibility across the board in respect of three areas. As has been debated considerably in this House recently, there is a £12 billion increase in public sector investment spending over what was previously planned, which covers particularly housing but also transport, including both road and rail. Relative to the Budget in March in particular—the coalition’s final Budget—but also to the summer Budget, there is also a lesser pace of spending reductions across the board. The Chancellor highlighted that, going forward, the aggregate real cuts would be something like 0.8%, compared with 2% previously, and that is a slower pace than was previously the case. If one looks at the mix—and there are some very interesting tables presented in the Treasury document and particularly by the OBR about the shifting balance—previously spending reductions made up significantly more than 50% of the planned savings but are now a bit less than 50%, and the balance is made up in other areas, including lower debt payments, which I think the noble Baroness, Lady Kramer, indirectly referred to.

Economy

Lord McFall of Alcluith Excerpts

Thursday 10th September 2015 Lords Chamber

[Lord McFall of Alcluith (Lab)]

My Lords, it is a pleasure to participate in this debate and to congratulate my noble friend Lord Haskel on it, particularly as it comes on top of the debate in the name of my noble friend Lord Monks earlier this year.

As has been mentioned, productivity has collapsed in the United Kingdom and, by the way, that is why employment is buoyant. The Economist had it right on 14 March when it said that if Britain,

“cannot get more from its legion of cheap workers, the recovery will stall”.

Output per worker is still 2% below the pre-crisis peak, while in the rest of the G7 it is 5% higher. The French could take Friday off and still produce more than Britons do in a full week, while, confounding stereotypes, the Italians’ output is 9% higher. When people are cheap, rather than invest in machines and technology, firms will hire them, so productivity is held down. While the Government’s report, Fixing the Foundations, is admirable in its rhetoric, we are still to find out what flesh there is on that issue.

On the austerity agenda, I welcome the debate because there is a need to highlight the nonsense that is spoken about it. We have to strip away the hype and expose the reality. What has happened with the Chancellor’s policy is that there has been a prolonged recession that has produced a lopsided and unbalanced recovery. Millions of people in Europe and elsewhere rightly feel that the current economic order is not serving their interests, hence Syriza in Greece, Podemos in Spain, Le Pen in France, Beppe Grillo in Italy, Trump in America and, dare I say it, the SNP in Scotland. The key is to challenge the nonsense on deficits and perpetual balanced budgets that the Chancellor comes out with. We need to give serious consideration to the development of a positive narrative on why running a deficit now holds the key to future growth.

In 2009, the United States was running a 10% deficit, yet today its economy is growing more than that of any European country which is running a surplus. We do not need to go back too far, just to the Second World War, when we had debts worth 250%, but at the time we had the National Health Service, a debate on welfare and a Conservative Government who, in the early 1950s, built 300,000 houses a year, a record that still stands. That has to be recognised.

I have been calling in Parliament for a state bank since 2009. We can see the example of the Nordic banks, while when the European Investment Bank gets up, it is set to finance more than £220 billion of investments by 2017 with a fiscal outlay of less than £20 billion. There is a lesson in that. Despite this Government failing to meet their fiscal targets, interest rates on UK public debt are still astonishingly low: 30-year and 50-year gilts yield 2.4% while the yields on comparable index-linked gilts are close to minus 1%. If anything comes near being a free loan, that is it, so there is a need to invest and for growth-promoting borrowing. That is what is required.

We also need to expand our thinking. Yes, businesses are wealth creators, but it is more than that. We need a fusion of business, the state and the working population to create wealth. I remind noble Lords of Google and Apple. Google was given a grant by the US National Science Foundation which allowed it to discover its own algorithm. Without that state funding, it would not have happened to Google. If one side of the triangle of business, the state and the working population is missing, we will not realise our aims. We have to reject the Chancellor’s narrow and woefully misleading view that the sole economic problem is the budget deficit. The main obstacles are pitiful productivity levels, the poor performance of manufacturing industry, a lack of capital investment and the resulting balance of payments deficit. We need new policies, but above all we need a new mindset. If my noble friend Lord Haskel’s debate today has introduced a chink of light for that, it will have done the House a great service.

Budget Statement

Lord McFall of Alcluith Excerpts

Tuesday 21st July 2015 Lords Chamber

[Lord McFall of Alcluith (Lab)]

My Lords, it is a pleasure to participate in this debate. I did not think I would see the day when Tory Back-Benchers cheered a Budget which introduced higher taxes, a Chancellor ordered wages in the country to go up by unilateral government fiat and a party ordered other people who owned homes—namely housing associations—to sell those homes. Perhaps next year the Chancellor will talk about getting the trains running on time.

The Chancellor said that this is a smaller-welfare, lower-tax economy—but it is absolutely not. This was a tax-raising Budget, not one of a tax-reforming Chancellor. There are £14 billion of tax increases, partly offset by £8 billion of tax cuts. We have perverse tax changes. The Minister mentioned the bank levy, which was introduced on 1 January 2011 and was intended to encourage banks to move to less risky funding profiles. The Parliamentary Commission on Banking Standards, on which I served, identified a bias in the tax system that encouraged banks to increase leverage and use debt rather than equity. We concluded that the tax system was “misaligned with regulatory objectives”. The commission recommended that the Government consult on introducing an allowance for corporate equity. Instead, in the summer Budget, the Government announced a reduction in the bank levy, offset by a supplementary corporation tax charge of 8% of bank profits. This change penalises the smaller, safer challenger banks which we all wish to see improve competition in the market. The winners are the larger, too-big-to-fail international banks. Instead of the Government following the recommendations of the parliamentary commission, the tax system is becoming less aligned to the objective of a safer and lower-leveraged banking system.

The first headline conclusion from the Budget is that its changes are regressive: the IFS has made it very clear that the Government take from the poorer rather than the richer households. Secondly, the Budget penalises hard-working people. George Osborne has talked about strivers and shirkers, but it is the strivers being penalised in this Budget. Thirdly, the Budget will do nothing for skills, work incentives or the productivity agenda. This Government have had the worst possible record on productivity for the past six years. The Governor of the Bank of England at the time, Mervyn King—now the noble Lord, Lord King of Lothbury—came before the Treasury Committee and said that productivity was the urgent issue for government, but nothing has been done to date. Lastly, there has been no attempt, as I mentioned, to simplify or reform a creaking tax system. The key fact is that the increase in the minimum wage cannot fully compensate for the major losses experienced by tax credit recipients.

We have seen one language for the campaign trail but another for legislating for regressive change. Already, one manifesto commitment—the £72,000 limit on an individual’s liability for care—has been abandoned. When it comes to strivers, 3 million receive working tax credits, which are there to supplement income, but they will all lose a minimum of £1,000 a year. Two out of three children growing up in poverty are from working households. What will this do for aspiration and social mobility? The Government have also abandoned the child poverty targets which they signed up to in the Child Poverty Act 2010. The Welfare Reform and Work Bill currently going through Parliament removes the four child poverty targets set out in the 2010 Act and the Government’s duty to meet those targets. The remit and the name of the Social Mobility and Child Poverty Commission have now been changed so that it will become the Social Mobility Commission. The term “child poverty” has been expunged from the language of government.

However, sadly, a dominant feature of the Government’s language is the pejorative use of the term “welfare”. Let us remind ourselves what welfare is. The welfare budget is £220 billion, £90 billion of which—41%—is the state pension. That will be untouched. We have housing benefit of £24 billion, or 11%, and we have tax credits of £30 billion. So when we talk about tax credits, let us get them into perspective in terms of the welfare budget and welfare provision. The Government have decided to protect the majority of the welfare budget, but that will produce intergenerational barriers. For example, under-25s are excluded from the minimum wage, penalised on housing benefit and discriminated against in terms of student grants. That is the experience being felt on the ground today.

A Caritas Social Action Network report dropped into my postbox this morning. Its overview says that it,

“has found that the welfare changes of the past five years and the delivery of those changes in the UK are pushing claimants and support staff to the edge of their capacity”.

It adds:

“Staff of CSAN charities are under increased pressure to provide support in the face of a rigid welfare system, which they see as a return to ‘Victorian’ poverty, and which prevents them from addressing the underlying, long-term issues in their clients’ lives”.

For short-term gain, the long-term issues have been ignored. That is Caritas saying that, not anyone else.

The FT has also stepped into the argument. I am not talking about the Morning Star here, but the FT, which I have been looking at over the past few days. It has said that because of the abolition of local government watchdogs, the changing and diminishing role of local government in England has been starkly exposed. There have been £18 billion of cuts in real terms since 2010, with another £10 billion due by 2020—twice the rate of cuts to UK public spending as a whole. What does that mean? The FT is very clear what it means. That £18 billion budget cut affects the elderly: 65 out of every 1,000 people aged over 65 were receiving care in their own home in 2009-10; the equivalent figure for 2013-14 was 46. There were 694,000 children on the Children in Need register in 2009-10; the equivalent figure now is 781,200—a 12.5% increase.

This is against the background of a severely weakened international system—one that, not least, has not been assisted by the debacle in Greece. We have seen one-third wiped off the value of the Chinese economy in the past month, equivalent to €1.5 trillion being destroyed, enough to write off Greece’s debt five times over. We have seen a political Chancellor directly intervening in the market, but without explanation, consultation or a measured approach. Maybe the Chancellor is master of the Treasury and the Government, but as time passes, perhaps he will be a servant of the economy.

Budget Statement

Lord McFall of Alcluith Excerpts

Wednesday 25th March 2015 Lords Chamber

[Lord McFall of Alcluith (Lab)]

My Lords, it is a pleasure to engage in this debate. I want to focus on three areas: first, the fantasy figures given by the Government in the Budget; secondly, the productivity puzzle; and, thirdly, the issues raised in Who is my Neighbour?, the Church of England document, which was welcome.

The Budget last week was nothing other than a party political broadcast with fantasy figures. The OBR was very clear: it is a rollercoaster by which public spending will fall to the floor for the first two years of the next Parliament, with cuts the gravity of which has not been seen to date. But miraculously, it will all recover the year before the next election, with £12 billion extra spending for largesse. It seems that the Chancellor’s reputation grows with every failure. Would he balance the books by 2015? Easy. He failed. In the Autumn Statement last year he predicted a £23 billion surplus. He failed; it is now £7 billion. He promised £12 billion in future welfare cuts. When asked to explain from where they would come, he could not explain. Notwithstanding all the rhetoric on social security, it has done nothing because the social security budget was £220 billion in 2010, and is still £220 billion. The policy in those areas has failed.

As the IFS has said, we are left guessing about radical cuts. The NAO’s Amyas Morse has said that the Government are performing radical surgery without knowing where the heart is. This has ensured that the election debate to come will be about spending cuts. The OBR has said that that sharper squeeze in 2016-18 is indeed savage. The IFS questions whether cuts on that scale can ever be delivered. This is against a background of the slowest recovery on record. Paul Johnson of the IFS was clear. He said that household incomes crawling back to pre-recession levels seven years after the crisis is no cause for celebration.

We have a Chancellor under whom consumption, rather than production, has defined the economic approach. The biggest failure has been mentioned: the lack of productivity growth between 2010 and 2015. It has been stable for the past 40 years, although not at great levels; but it was nonexistent from 2010 to 2015, thereby undermining wages and incomes. The failure to understand productivity undermines confidence in the accuracy of any figures produced by this Government. The economy normally grows at lower rates after financial crises, but stagnation in productivity is extremely rare, and that is what we have witnessed. The question for the next Government is: is this temporary or permanent? The answer will determine our future economic prospects.

There is a dissonance between what the Government state is a “long-term economic plan” and what is happening in the country. Help to Buy ISAs and pennies off a pint are insignificant compared to what is happening in the country, particularly when put against the big picture. That big picture, on which the Government have failed, is a lack of a national infrastructure board, a lack of decentralisation to ensure that local economies prosper, and a lack of a productivity plan. We need a 20-year productivity plan, with annual reports to Parliament, so that we get this right. The Government have gone on about supply-side policies, but such policies on transport, housing and skills have been wanting. I am a member of the Economic Affairs Committee, which today published a report on HS2. The £50 billion of public investment, with £31.5 billion in direct subsidy, should be set against the background of no national transport infrastructure plan. How can one plan for a country without that? When Sir David Higgins came before the committee he was very clear. He supported an east-west line for the north. I asked him why. He said, “I talked to people in Manchester, who told me that it was a good idea, and I accepted that”. That is not the way to go about developing our transport and economic policies.

In 2013 we completed the lowest number of houses since 2010, and that includes a reduction of 5% in 2012. There was a time, in the 1950s, when a Tory Government under Harold Macmillan had an ambition to build 300,000 houses, and they did. Sadly, there is no ambition here on one of the most pressing problems facing people in this country, particularly young people.

This Budget is a manifesto for a meaner Britain. We need to re-inject a politics that is about beliefs and society. That is why I welcome the Church of England report, Who is my Neighbour?. It is very clear that today in Britain it is impossible to support a family on the minimum wage. The report notes burgeoning in-work poverty, whereby 75% of the welfare cuts are to the working-age population. The stark truth is that parents with low-wage jobs and young people have suffered most in this crisis. If we are to recommend a manifesto that is more tolerant, efficient and productive for the country, we could start with the six key values which the Church of England bishops have written in their letter regarding the general election.

The debates about the Budget have centred on the dry currency of figures, rather than on people’s lives. But we have a choice. A no less august body than the Financial Times was very clear in its leader when it said:

“Nothing is inevitable about Britain’s fiscal path”.

We can:

“Pursue an absolute surplus with further tax cuts”,

and thereby have,

“deep cuts in welfare and unprotected departments”,

Or we can:

“Raise £10bn in tax and allow borrowing for investment, and public spending austerity may come to an end next year”.

Those are the words of the Financial Times, not mine.

These are all feasible choices. No one can say at the next election, “There is no alternative”. People’s future livelihoods are indeed at stake at a time when there is disengagement and disillusionment among the electorate. The centre is being questioned as to whether it can hold in Westminster. There is a duty to consider the human and the societal elements, and the sentiments embodied in Who is my Neighbour? are a good start.

“The care of human life and happiness, and not their destruction, is the only legitimate object of good government”.

Those words are not from the Church of England document or Labour, but Thomas Jefferson. That cry is still relevant hundreds of years later. The Government have failed in all three areas and it will be up to the next Government to tackle these important subjects after the election comes in fewer than 50 days.

--- Later in debate ---

[Lord Deighton]

Inequality has not increased at all between the previous Government and this Government. That is not to diminish the problems that people at the bottom end of the scale face. This Government have tried to deal with the root causes of poverty: worklessness, low earnings and poor education. That is where the Government’s premier programmes have been addressed. The number of workless households has fallen by about 600,000 under this Government. Many noble Lords, including my noble friend Lord Shipley, have commented on the situation with respect to employment and the number of jobs that have been created. The noble Baroness, Lady Smith, asked how tax receipts could come down when employment went up. The reason was that we moved up personal allowances and took people out of tax. It is as simple as that.

This Government intervened in many critical ways to protect living standards for people. I shall not go through the list again because we do not have time. The noble Baroness, Lady Thornton, and the noble Lord, Lord Davies, cited zero-hours contracts. They represent just over 2% of the total workforce. Of the jobs created, the majority are at the high or middle end and the vast majority of them are full time. The party opposite should accept that creating 2 million new jobs is okay. It does not have to keep describing what the problems with it are. It is actually a good thing; it is part of the recovery. It is much better to have those people in work. As I have said, the jobs are principally at the middle and high end and they are permanent jobs.

Our focus has been on trying to protect the young and old. We have protected pensioners through the triple lock. The measure again tells us that pensioner poverty is at an all-time low. I listened carefully to the comments made by the noble Baroness, Lady Thornton, about disability. Probably my most rewarding experience in the past 10 years was working on the Paralympics and seeing the difference that they made to people’s perception of the ability in disability. That is a legacy that, on a cross-party basis, we should absolutely build on.

I shall talk about spending cuts as there is significant concern about the potential impact of continuing, in the words of the noble Lord, Lord Layard, the dismantling of public services. That is absolutely not the intention of spending taxpayers’ money more carefully, of looking at ways of reforming public services, of being focused on the outputs and of being more efficient about the inputs that go into them. There is still significant opportunity for reform in delivering public services more efficiently, and that is where the focus of the spending cuts should and will be.

The noble Viscount, Lord Hanworth, asked where privatisation fitted into it. I make no apology for this party being careful with taxpayers’ money. If you really want to look at the record of this Government, we adhered precisely to the spending plan we set out five years ago. We have delivered that in a disciplined way with the public’s view of public services being that they have in fact improved. That is the evidence.

A number of noble Lords, including the noble Lords, Lord Bilimoria and Lord Davies, referred to the defence budget. Let me restate that at £34 billion, we have the second-largest defence budget in NATO. It is the largest in the EU. We are currently spending 2% and we will decide what to do at the next spending round. Again, my preferred approach to spending is that we have to have a plan and understand what we are trying to accomplish, and the budget numbers flow from that. It is about what you are trying to accomplish. I am delighted that the right reverend Prelate the Bishop of Portsmouth was able to acknowledge the tripling of the church roof fund.

Let us switch to the deficit. It is at the heart of the differences in fiscal policy between the parties. We have discussed the case put by the noble Lord, Lord Skidelsky, over the past few years. I was taught Keynesian economics at the feet of the noble Lord, Lord Eatwell, so I certainly understand the theory, but in 2010 this country had a massive, unsustainable deficit and the practical situation was that action needed to be taken to reduce that deficit in order for the public and the markets to have confidence. Frankly, we were faced with no other option but to deal with that as the primary objective and responsibility of government at that time. Had we not dealt with it as effectively as we did, it would have been an irresponsible act and would have left us substantially exposed to future debt costs. It is a bit like a vastly overweight person saying, “I’m going to start a diet in two years’ time, but in the mean time, keep serving me the chips and chocolate”. That is how it would have been.

[Lord McFall of Alcluith]

The Minister talks about the debt, but let us think of the debt that they inherited in 2010, which was £870 billion. That figure has now almost doubled to more than £1,500 billion. Why has that debt doubled in a period when there has been a mania from the Tory Front Bench about having to pay off the debt?

[Lord Deighton]

Technically what happened was that we stuck to the spending plans, growth did not recover as we expected, principally because the rest of the world was in recession, so the tax receipts did not come in, and the deficit continued to go up. That is the reality of the situation. If you listen to the two sides on the deficit argument, one is asking why we have not cut fast enough and the other is saying that we have to cut a little slower. I think that, given the circumstances, my right honourable friend the Chancellor has navigated the balance very effectively. My noble friend Lord Flight made that point.

[Lord McFall of Alcluith]

The Minister has failed to answer. In the light of his failure to answer, will the Government adopt a more modest approach to this situation and recognise their failure on debt over the past five years and the kid on that they are trying to exercise on the British public?

[Lord Deighton]

The Government’s strategy is crystal clear. The benefit of getting the deficit under control is absolutely worth it in terms of fixing the roof while the sun is shining. That is the philosophy. To do it over a two-year period and to get control of our public finances so that we can then grow and focus on, for example, the productivity argument I shall speak about in a minute is the critical part of the argument.

Economy: Public Finances

Lord McFall of Alcluith Excerpts

Tuesday 24th March 2015 Lords Chamber

[Lord Newby]

My Lords, last month’s trade figures were the best for 15 years. No doubt the noble Lord would say that that is not good enough. However, we have spent more money more effectively through UKTI in building up our trade with less traditional countries such as China. Further support was given to that in the Budget.

[Lord McFall of Alcluith (Lab)]

My Lords, in 2010 the Government inherited £786 billion of debt. Five years later that figure is now £1,540 billion—almost double. The Chancellor in his Budget said that the Government were paying the debt down. Was he telling the truth?

[Lord Newby]

My Lords, it is no secret that this Government have borrowed over half a trillion pounds as we have slowly got to grips with the mess we inherited. Debt has come down by about 1% of GDP for each year we have been in government—the level of consolidation that the IMF says is most appropriate in these sorts of circumstances.